Black Money


Black Money

The core of a legitimate economy is white money. Black money refers to the income on which tax has been totally or partly evaded. Part of this money is utilized for consumption and part for hoarding or investment. It follows from this fact that black money goes unaccounted for during a country's tax assessment period.

The massive circulation of black money could pose a big menace to a country’s economy and has the potential to undermine the entire fiscal structure of a country. It also causes huge losses in tax revenues to the government. The evil of black money does not revolve around a particular country but is a global phenomenon, although in poorer countries the threat from it is more pronounced than in relatively wealthier ones.

The proliferation of a parallel economy

Black money is generated through activities that are kept hidden from the purview of authorities. Taxes are not paid on this money. Contrasted to this is the white money that is shown in relevant accounts and tax paid, if due. The circulation of black money gives rise to what is referred to as a ‘parallel economy’-- an economy that stands diametrically opposite to a legitimate economy. Parallel economy has various monikers and are also referred to as ‘black economy’, ‘unaccounted economy’, ‘illegal economy’, ‘subterranean economy’, or ‘unsanctioned economy’.

India, for instance, which has of late witnessed a shocking number of black money hoarders being exposed, the money involved in illegal transactions (parallel economy) is estimated to account for anywhere between 20% and 50% of the country’s GDP. Experts even maintain that the amount of balk money generatein India could be double of Some observers even maintain that the annual rate of growth of black money in India is higher than the annual growth-rate of its GDP.

The genesis

The genesis of black money can be attributed to several factors. However, the most widespread tale on black money is associated with World War II. The supply of industrial goods to the Allies was cut during the War from their traditional suppliers, leading to a severe shortage of vital necessities. This prompted the British Government to indulge in excessive inflationary finance tactics for its war efforts, leading to a sharp rise in the prices of commodities. Tax rates on higher incomes and excess profits were also raised, prompting many to resort to black marketing and tax evasive measures. People made huge profits by dealing in items in short supply giving rise to a psychology that more money could be made from shortages than from production and expansion of business.

Controls and licensing system

The License Raj policy led to an unprecedented rise in corruption in India. Although it was formulated by India's first Prime Minister Jawaharlal Nehru to make India a planned economy where the state would control all aspects of the economy but was misused by a coterie of power to amass unaccounted for wealth in return for favors to some businesses. The License Raj has since been replaced by a policy of economic liberalization, but the after-effects of the evil it brought on society still exist today.

The government, in spite of remaining vigilant, has been apparently unable to prevent the unscrupulous vested with administrative powers from amassing wealth in black money by misusing the controls and regulations still in place today. In the past, controls over price and distribution have resulted in the generation of black money on a huge scale. Price controls in the absence of an adequate system of distribution and an effective arrangement for increasing supplies can potentially generate huge amounts of black money. The licensing system requires a large number of inspectors to execute various formalities which means that an equally large amount of money has to be paid ‘under-the-table’. And where controls cannot be implemented, one sees a lot of harassment and black money generation.

Tax structure

The tax structure of a country is also a prime determinant in the floating of black money in that country. In India, direct taxation on income and wealth was very high till recent years, which prompted people to evade taxes. Until a decade ago, the marginal income tax rate was as high as 75%, while it was even 100% when combined with wealth taxes. Similarly, corporate tax rates were significantly high prompting individuals to evade taxes.

Lack of enforcement of tax laws

: Although the Indian tax system has a wide range of tax laws in place for segments such as income tax, sales tax, stamp duties and excise duty, widespread corruption in almost all the departments has rendered their enforcement very weak and ineffective. Moreover, the taxes have high rates, prompting businessmen to evade them, which set off a chain reaction down to the wholesale, retail and production levels.

Controlling flow of black money

The menace of black money stares Indian economy in its face. Ironically, one of the main causes for the continued and widespread prevalence of black money in India is the government’s apathy and leniency. Moreover, following the abolition of the Gift Tax Act, black money racketeers have found more lee-way in generating such unaccounted money. The Act, constituted in April 1958, stated that all gifts in excess of Rs 25,000, in the form of cash, draft, check or others, received from one who doesn't have congenital relations with the recipient, were taxable

Controlling flow of black money

The menace of black money stares Indian economy in its face. Ironically, one of the main causes for the continued and widespread prevalence of black money in India is the government’s apathy and leniency. Moreover, following the abolition of the Gift Tax Act, black money racketeers have found more lee-way in generating such unaccounted money. The Act, constituted in April 1958, stated that all gifts in excess of Rs 25,000, in the form of cash, draft, check or others, received from one who doesn't have congenital relations with the recipient, were taxable

India, which has more than 50% of its population living in abject poverty, can do without the millions spent on marriages, functions, parties, which are all sourced from untaxed funds. Given the rapport between black money operators and politicians in the country, the Income Tax department fails to arrest the menace. Subsequent governments in India have set up several committees to check black money while many Voluntary Disclosure Schemes have also been floated. However, all these steps taken to resolve the problem have not completely succeeded and there is urgent need to take harsh steps at checking and controlling the flow of black money.

Rationalization of tax structure

Notwithstanding this fact, black money flow can be effectively controlled by the rationalization of the tax structure and regulatory measures, demonetization and stringent legal action to curb illegal activities. It must be noted that it is not only the rich who evade taxes but certain shortcomings in the existing tax system lead to tax evasion. Therefore, a simple, clear and transparent tax regime obliges citizens to pay taxes correctly. The tax structure must always come up with incentives for compliance. Tax compliance must always be made cheaper and evasion dearer. As India grows in wealth, a simplified taxation system will mean a surge in the flow of money in government coffers.

Several experts have proposed a number of ways to the Indian government for bringing back black money stashed away in banks in foreign countries such as Switzerland, Mauritius and Liechtenstein. For instance, K V M Pai, former chief commissioner of income tax, has proposed an amnesty that offers immunity with conditions such as a tax of 30% plus interest. He has also proposed for the incorporation of a clause in the income-tax return, requiring taxpayers to give details of their foreign accounts. Further, he has also recommended administrative measures to gather intelligence on those who do not disclose their foreign accounts. Nevertheless, it must be remembered that the mixed economy India purports to be is actually a capitalist economy and under such a framework, black money cannot be entirely controlled. However, it can be limited and brought to manageable limits.

Impact of black money

A healthy economy thrives, to a large extent, on the money that comes to that country's government as tax revenue. The floating of black money causes great losses to the country's exchequer. The following are some of the other ways in which black money can affect a country's economic and social progress.

Misuse of productive resources

Black money in an economy tends to cripple the free flow of a country's resources in the right direction. It also widens the income gap. Salaried individuals, especially those in the lower rung of the corporate ladder, do not see their incomes rising unlike those in the higher echelons as it can be safely assumed that the latter group has huge sources of unaccounted income, the vindication of which comes from news reports almost on a daily basis.

An impediment to a country's growth indicators

The presence of unaccounted money acts as a block on the right assessment of a country's progress. The assessment of a country's progress is dependent on the accurate calculation of the savings-to-income ratio and sector-wise composition of national income. The floating of black money could Again, black money is usually parked in so-called safe tax havens overseas, which is a huge drain on the national exchequer. This way, a country also unwittingly becomes a ‘de facto’ lender of capital to more advanced and wealthier nations.

Fosters anti-social elements

Finally, black money needs ‘muscle power’ for its protection and proliferation as well as accounting experts, liaison officers who negotiate between black money operators and political leaders, threatening to corrupt the entire social and political fabric of a country.



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